UPDATE 3-Vodafone wins ground in Indian jv tussle -sources

Mon Jan 31, 2011 2:00pm EST

Related Topics

* Essar downplays Vodafone Essar listed shell move -sources

* Change follows objections from Vodafone -sources

* Essar issues statement saying no change in its plans

(Writes through with new details, including Essar downplaying not abandoning plan and management accepting scheme will not happen before May deadline)

By Hugo Dixon, Editor, Reuters Breakingviews

LONDON, Jan 31 (Reuters) - Indian mobile phone operator Essar is downplaying plans to inject part of its 33 percent stake in the Vodafone Essar venture into a listed shell company after objections by its partner Vodafone (VOD.L), according to people familiar with the situation.

Instead, the partners have agreed to appoint two investment banks to value the stake in the Indian mobile operator as a precursor to Essar deciding whether to sell it to Vodafone.

Essar has until May to decide whether to exercise options to sell the stake.

Essar was previously pushing a plan to inject an 11 percent stake into Indian Securities (ISL) ISEC.BO, a listed company it controls. It argued that this would reveal its true value.

An Essar spokesman denied a decision had been taken to call off the planned injection of its Vodafone Essar stake into ISL.

"There is no change in our plans to merge Essar Telecommunications Holdings Pvt. Ltd. with India Securities," a spokesman said. "As we have stated before, the investment banks are free to choose whether or not to consider the listed value of ISL in their fair value determination."

Management, however, now accepts that Vodafone's tactics mean it will no longer be able to complete the merger before the May deadline, according to a person familiar with the situation.

Vodafone saw Essar's plan to inject the stake into ISL as an attempt to artificially inflate the stake's value as a precursor to selling it, arguing that ISL was a highly illiquid vehicle.

When Vodafone acquired a 67 percent stake in Vodafone Essar for $11.1 billion in 2007, it gave Essar two put options over its 33 percent stake. The first allows Essar to sell the entire stake to Vodafone for $5 billion.

The second allows Essar to sell between $1 billion and $5 billion worth of Vodafone Essar shares at a "fair market value".

Essar has until May to decide whether to exercise the options. Under the second option, fair market value is supposed to be determined by two investment banks, one appointed by each partner. If the two banks don't agree, a third investment bank would be appointed to adjudicate.

The value paid by Vodafone, under this option, would be its fair market value plus around $700 million to take account of the fact that Vodafone Essar is carrying extra debt as a result of its push into 3G mobile technology.

It is this valuation process that the partners have now inaugurated.

After Essar said it planned to inject its stake into ISL, Vodafone complained to the Indian court that the merger documents for the deal were not clear. It also complained to the Bombay Stock Exchange that there were oddities in ISL's valuation.

According to two other sources, Essar has mandated Standard Chartered and Vodafone has hired Goldman Sachs.

Vodafone declined to comment.

See also:

-- BREAKINGVIEWS-Vodafone wins first round in Essar war [ID:nLDE70U1GL]

(Additional reporting by Kate Holton in London and Devidutta Tripathy in New Delhi; Editing by Andrew Callus and Alexander Smith)

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